Banking Sans Banks

The emergence of any new phenomenon often spells the demise of the existing scenario. The internet revolution is credited with ending the reign of several products, services and businesses, such as snail mail and music CDs. Physical marketplaces are fast losing their importance in the era of e commerce. Gaming, libraries, ticket counters, bill payment counters, newspapers & publications, advertising boards etc. have all rapidly moved to the internet domain, leveraging its ability to connect them with a massive borderless audience easily, in next to no time and cost.

Banking too has not remained immune to the internet wave. The first wave saw the emergence of tools and practices that simplified or did away with tiresome branch banking processes and counters. The traditional banking concepts prevailed, but the approach was now far simpler. The next wave of the internet revolution, however, might very well change the very face of the banking landscape. Internet enabled innovations are today transforming the way the world will bank in future. One such innovation is internet finance of which crowd funding and peer to peer finance are two major concepts.

Crowd funding, in the simplest terms, can be described as the raising of funds for an initiative or campaign from a 'crowd' (mostly the supporters of the idea) through the use of an internet platform to facilitate the process. The underlying initiative could be a non-profit, promotional or even commercial campaign, such as one that raises funds for a startup or new business idea. Of the different types of crowd funding, the one called 'reward based crowd funding' promises some rewards to the contributors at the end of the campaign. For example, in the absence of a single large investor, the proponents of a new business idea can seek to raise funds through crowd funding where the investment and risk would be divided among a number of small investors brought together on an internet platform. The investors might be promised equity stake in the startup business in return. Crowd funding can be looked at as a means of alternate finance, in principle quite similar to an IPO.

P2P finance on the other hand aims at matching the needs of investors (to earn interest on their savings) with that of the borrowers (to obtain funds for their projects), just as any other banking institution does. However the need to have a bank as an intermediary is eliminated by the use of internet platforms that bring the investors and borrowers together, allowing them to transact directly. P2P finance operates on the basic concept of presenting fund requirements of individuals/ small businesses as investment opportunities to ordinary savers or small investors. Most P2P finance platforms provide modelling and marketing of each P2P loan as an aggregation of smaller standard loan units, which can then be floated in the online virtual banking space. It thus allows injection of funds towards a single loan by multiple investors up to their capacity and as per their risk appetite. As compared to traditional banking, this model of internet finance fetches higher returns for investors, while ensuring lower cost of funds to borrowers, thereby offering a better deal to both parties. This is achieved by freezing the interest rate in the zone of possible agreement - between the deposit and lending rates offered by banks. The investors are allowed to choose the projects or loans they wish to fund. The repayment can be injected back into the system as reinvestment.

Internet finance is not far from being considered mainstream. It is now threatening to overtake traditional banks. However the banking community and regulators are at a crossroads, where the rules of the game are yet to be standardized and measures devised to boost consumer confidence in the system, and ensure smooth operations, and minimum default and fraud. The world is set to witness a major transformation in the way it banks.